Audit Tips for Business owners

There are several factors that can raise eyebrows at the IRS and trigger an audit, but knowledge is power, and understanding what agents are looking for in a return can help you avoid the hot seat.
The IRS website contains detailed information that taxpayers can tap into to eliminate--or at least minimize-- the fear and dread that most people experience when dealing with the IRS. The site also provides the training tools used by auditors that can provide clues on what they are looking for in a return. Once you know agents’ mode of thinking, you can adequately prepare. In fact, if you own a small business, you want to organize your documentation so that you are always ready in the event of an audit.
When it comes to income, auditors will first look at internal controls. The agent wants to know if you are keeping a decent set of books which tie out to your bank accounts and reflect your current lifestyle. To the IRS, a lack of internal controls signifies a potentially inaccurate reporting of income. Not having books or decent records is a major red flag. The auditor will dig in, possibly expanding the audit to cover every line item on the tax return or to include other open tax years. That can get expensive-- not to mention stressful.
Tip No. 1: Maintain your books and records on computerized software and reconcile your bank accounts.
Auditors are trained to detect unreported bartering income. Remember that even if no money changes hands, you are required to report all bartering income, and the IRS knows this is an area of high noncompliance. It’s a tough economic climate right now, and many entrepreneurs turn to bartering to help protect cash flow.
Tip No. 2: Make it a matter of course to record all bartering activity in your books at its fair market value.
Assigning income to other parties—such as another business that you own to reduce net operating losses in that company and avoid self-employment and income tax on the income can be a hairy issue. If the auditor goes through your contracts and finds one that appears to be unfulfilled (because the income was shifted), be ready to provide copies of tax returns for your other businesses for examination.  Do I hear the popping sound of the can of worms being opened?
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Tip No.3: Don’t play games with the money. Keep your businesses separate from each other and record all income and expenses accordingly.
Tip No. 4: Make sure you have an audit trail for all funds deposited to bank accounts that are not taxable income. Keep copies of cancelled checks of monies deposited with your bank statements to identify any transactions that do not represent sales.
Tip No. 5 – This again is an admonition to not play games with money. Every transaction you enter into should be for a purpose other than just making the tax code work to your benefit.
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